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Thursday, March 23, 2017

Stocks Deflate on News of Healthcare Vote Delay

Charles Schwab: On the Market

Posted: 3/23/2017 1:15 PM ET

Stocks Deflate on News of Healthcare Vote Delay

After being modestly higher for most of the day amid cautious
optimism over this evening's vote on a widely-watched healthcare bill,
U.S. equities lost steam late to finish near the flatline after reports
surfaced that the vote would not happen today amid continued political
wrangling. News on the economic front was mostly positive, with new home
sales surprising to the upside in February, and as some regional
manufacturing activity moved further into expansion territory, while
weekly jobless claims unexpectedly increased. Treasuries were little
changed and gold was lower, while the U.S. dollar ticked higher and
crude oil prices lost ground.

The Dow Jones Industrial Average (DJIA) lost 5 points to 20,657, the
S&P 500 Index shed 3 points (0.1%) to 2,346, and the Nasdaq
Composite declined 4 points (0.1%) to 5,818. In moderate volume, 805
million shares were traded on the NYSE and 1.7 billion shares changed
hands on the Nasdaq. WTI crude oil fell $0.34 to $47.70 per barrel and
wholesale gasoline lost a penny to $1.59 per gallon. Elsewhere, the
Bloomberg gold spot price declined $3.04 to $1,245.80 per ounce, and the
Dollar Index—a comparison of the U.S. dollar to six major world
currencies—was 0.1% higher at 99.74.

PVH Corp.
(PVH $99) announced 4Q earnings-per-share (EPS) of $1.26 on a GAAP
basis and $1.23 ex-items, topping FactSet projections of $1.19, while
revenues dipped 0.4% year-over-year (y/y) to $2.0 billion, mostly in
line with expectations. The company announced 2017 EPS guidance on a
GAAP basis of $6.20 to $6.30 for the year and of $0.73 to $0.75 for 1Q,
and the Board authorized an increase and extension to the current stock
repurchase program. Shares rallied.

Cintas Corp.
(CTAS $126) announced 3Q EPS of $1.11 ex-items, besting the consensus
estimate of $1.07, while revenues increased 5.3% y/y to $1.3 billion,
matching forecasts. Also, Scott Farmer, the company Chairman and CEO
stated that this was the 14th consecutive quarter of y/y gross margin
improvement. Shares of CTAS were nicely higher.

With equity news a bit on the lighter side, a large amount of investor
focus was tuned to the current health-care bill that was expected to be
voted on later tonight by the House of Representatives, but reportedly
delayed until tomorrow. Though the legislative process is currently
underway, many questions still surround the health-care industry and may
or may not be addressed by the proposed legislation, however, Schwab's
Director of Market and Sector Analysis, Brad Sorensen, CFA tackles this
sector with his three-to-six month outlook in the most recent Schwab Sector Views: How Should Investors Look at Health Care Now?. And be sure to check out Brad's views on ten other sectors at www.schwab.com/marketinsight. Follow Schwab on Twitter: @schwabresearch.

New home sales surprise to the upside, jobless claims unexpectedly increase

New home sales (chart)
rose 6.1% month-over-month (m/m) in February to an annual rate of
592,000, above the Bloomberg forecast of 564,000 units, and compared to
the upwardly revised 558,000 unit pace in January. The median home price
was down 4.9% y/y at $296,200. New home inventory dipped to 5.4 months
of supply at the current sales pace. Sales declined m/m in the
Northeast, but rose sharply in the Midwest, and also increased in the
West and South. New home sales are based on contract signings instead of
closings.

Weekly initial jobless claims (chart)
increased by 15,000 to 258,000 last week, above forecasts of 240,000,
with the prior week’s figure being upwardly revised to 243,000. The
four-week moving average rose to 240,000 from 239,000, while continuing
claims dropped by 39,000 to 2,000,000, south of estimates of 2,040,000.

The Kansas City Fed Manufacturing Activity Index for March rose
to 20, from February's 14 reading, where it was forecasted to remain,
with a level north of zero depicting expansion.

Also, Federal Reserve Chair Janet Yellen delivered opening remarks this
morning at a conference in Washington D.C. Though some market
participants likely listened for indications on the trajectory of the
U.S. economy and the pace of future rate hikes, the Fed Chair did not
comment on monetary policy.

Treasuries were nearly unchanged, as the yield on the 2-year note lost 1
basis point (bp) to 1.24%, while the yields on the 10-year note and the
30-year bond were flat at 2.41% and 3.02%, respectively.

As noted in the recent Schwab Market Perspective: Teflon Market,
helping to bolster our belief in a strengthening economy—and our
bullish stance—is the increased hawkishness of the Federal Reserve and
their decision to hike rates at the March Federal Open Market Committee
(FOMC) meeting. Additionally, the Fed signaled willingness to continue
to hike rates in the coming months, which would mark the first time we
would see more than one hike in a year since the financial crisis. Read
the whole perspective at www.schwab.com/marketinsight.
Also, for analysis on the Fed and its implications for bond investors,
see the video from Schwab's Chief Fixed Income Strategist, Kathy Jones
and Vice President of Trading and Derivatives, Randy Frederick titled Three Fed Hikes Seen in 2017: How Should Bond Investors Respond?, at www.schwab.com/insights. Follow Kathy and Randy on Twitter: @kathyjones and @randyafrederick.

The week's economic calendar will culminate tomorrow with a look at the manufacturing sector, as preliminary durable goods orders will be released, forecasted to show a 1.3% m/m increase for the headline rate during February, a 0.6% rise excluding transportation, while orders for nondefense excluding aircraft, considered a proxy for business spending, is estimated to have ticked 0.2% higher m/m. Finally, the preliminary Markit Manufacturing PMI Index will
be reported, with economists expecting an uptick to a level of 54.8 for
March from the 54.2 posted in the month prior, with a reading above 50
indicating expansion in activity.

Europe and Asis mostly higher ahead of U.S. health care vote

European equity markets finished the trading day higher, as traders
await today's vote on the proposed replacement for the Affordable Care
Act in the U.S. House of Representatives, with market participants
looking toward the outcome as a gauge of the Trump Administration's
ability to implement its pro-growth policies. The European Central Bank
(ECB) gave banks in the euro-area approximately $252 billion, the
largest net amount yet, in its Targeted Longer-Term Refinancing
Operations program, as ECB President Mario Draghi signaled that time is
running out for banks to get their house in order with the end of the
central bank's current quantitative easing program in mind, which
according to a Bloomberg survey is now expected to be around mid-2018.
In Germany, the country's lower house of parliament is in the early
stages of introducing new laws with respect to insolvency proceedings
after a recent Tax Restructuring Decree was overturned, while in other
tax news, the country reported a rise in February tax revenue, which
benefitted from stable economic development, with income and sales tax
revenue both increasing per the Deputy Finance Minister. Meanwhile, in
the U.K., some upbeat retail sales data did little to dispel the notion
of concern about the outlook of consumers in Britain if the current rise
in inflation, which is expected to reach 3 percent later this year,
continues.

Stocks in Asia rebounded some from yesterday's selloff and closed mostly
higher with financial and industrial shares leading gains. Japanese
equities advanced, shrugging off three days of declines, with the yen
slightly weaker, as the current health-care bill discussions in the U.S.
may be increasing the demand for safe-haven assets. The yen had risen
in the previous seven-straight sessions. Mainland Chinese securities
increased slightly, and those traded in Hong Kong were mostly flat amid
reports that the country's financial regulators may need to take further
steps to reign in leverage that continues to mount after the bond
market in the world's second largest economy experienced one of its
worst months since December 2010. Some smaller banks in the country were
said to have missed debt payments amid a surge in interbank rates,
which spurred emergency liquidity injections from the central bank.
Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA,
discusses how rate hikes by the Federal Reserve put pressure on the
People's Bank of China to respond to manage the currency and capital
flows in his recent article, The Fed has China in a Tough Spot, at www.schwab.com/marketinsight and follow Jeff on Twitter: @jeffreykleintop.
Elsewhere, stocks in Australia gained ground, led higher by strength in
mining and energy stocks, with a rebound in crude oil prices also
indirectly lending support, while markets in South Korea and India also
advanced.

Tomorrow, manufacturing PMI reads from across the globe will dominate
the international economic calendar, while other reports on tap include
consumer sentiment from South Korea, trade data from Australia, the
Leading Index from Japan, GDP from France, and PPI from Spain.

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